Back in 2008, I ran this updated chart of the Case Shiller Housing Price Index by BP reader Steve Barry. It was widely reproduced around the web. (Unfortunately, some unscrupulous folks striped Steve’s authorship off of it, and passed it off as their own).

I asked Steve to update Shiller’s NYT chart, now that much of the government intervention has run its course. There is still massive Federal Reserve subsidies in the form of record low rates. But the short term bounce caused by HAMP, Foreclosure abatements and first time home buyers tax credits are mostly over.

Here is Steve’s chart:>
click for ginormous graphic
Chart courtesy of the NYT, as modified by Steve Barry

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

Napster: I don’t think 4.35x Median income vs the 4.1x mean seems high? Until interest rates move up I am not sure we will see additional downward moves in home prices (nationally, some individual markets are still crazy).

As I am sure you know, comparing San Francisco market to the other markets is not advisable because San Francisco is a special market for two main reasons:

1) small amount of land available; there is no perimeter of land outside the main buildup. Nearly 100% of the 7 by 7 mile city is already built upon. This is true for most of the Bay Area, from Oakland and Marin down to San Jose. It is the “outer edge” of the expansion outside of the Bay Area, places like Stockton, Santa Rosa, and Gilroy where the new house construction was occurring over the last 10-15 years.

2) the beauty of region makes it a mecca for the very wealthy, which bid up prices; the wealthy are also more insulated from economic downturns than the lower 99% of the population who earn less than $100,000.

I stopped updating this regularly, as the index was bouncing around a bit and it is tough to work on such a compacted scale. I don’t know that Shiller himself updates this long-range version. I discovered that it basically charted The Case Shiller 20 city composite. As Barry pointed out, despite all the artificial measures, I would characterize the bounce as dead elephant and it has leveled off already. Surely it is futile to try to stabilize an index well above all previous non-bubble highs.

Napster: I don’t know what this says, if anything, about prices relative to income…it says something about inflation-adjusted prices relative to time…but a good conclusion would be, if Shiller did the data correctly, an index that far above all past levels is not sustainable. The projection in red is purely mine and I was very kind not to scare the kids…why couldn’t it overshoot to the downside?

Mannwich: I have never posted under another handle and don’t post on other blogs…just into a new career, helping society in my own way, and don’t have time to post. Also, I would sound like a broken record already. Still see a deflationary debt crash…the Fed multiplier, last time I checked, was less than one – meaning every new dollar or debt created was HURTING the economy. The stock market is just a bunch of computers trading with each other now…up only when volume is low.

Also, if my deflation scenario is correct, inflation adjusted income will be falling as well, so your price to median income would not significantly improve despite further price drops.

Said more simply, deflation will kill home prices above what has already occurred. Interesting from the chart that during the Great Depression, home prices actually rose, albeit from low levels, likely softening the depression. A depression now will be hurt by falling prices.

I ask because I am looking to buy land to put a house on in a few years, and I am unsure if I should buy now or wait longer for a better deal. It doesn’t look like lot prices have changed at all in the Midwest market.

Thanks, Steve – the one added normalization for recent decades that might be useful would be to normalize by square footage, as the trend in American new-home sizes seems to have mirrored that in American waistlines. Surely even a bubble-priced 3000-sq-ft vintage 2005 McMansion is worth intrinsically more than a more-modest 2000-sq-ft home build a few decades earlier was at the the time of construction, assuming similar building quality 9in an average sense – YMMV) and sitting on a similar lot. This effect may be one reason to not expect a massive overshooting to the downside this time around.

Back to the chart: Just keep reminding yourself that Ben Bernanke says “bubbles cannot be spotted in real time” – yes indeedy, the runup that began around 2002 was really quite subtle and hard to spot until, oh, around 2006, at which point it was of course too late to do anything but watch it pop.

I hear you bro, but my point refers to something I said in yesterday’s comments.

The median of individual income has not changed much (if at all) since 1970, but lets look at household income If we have a home ownership of 65% that means 65-50 = 15% of the home owners earn less than the median household income of $50,233 (in 2007, according to the census bureau). Mind you that this includes all combined incomes of families who are considered one household, which is much different that the median of individual income — which hasn’t changed much.

Here is a chart:

So if the median household income of $40,000 in 1970 goes to 50,233 in 2007, does that percent of increase correspond to the price of housing percent of increase? Using natural logarithms, I get Ln ( 50233/40000)/ (2007-1970) … which equals 0.00615. This means that the average rate of increase per year is only 0.6%. The total percent of increase over the 37 year span from 1970 to 2007 is 25%.

What is the percent of increase of housing during this time? Look at the Case-Shiller index above. It goes from 110 to 190 (in 2007) — a 72% increase and sits right now at 145 — which is still a 31.8% increase. If the benchmark was 140, then it would be a 27% increase.

All of this is relative to the median of household income, which is larger than median of individual income and also has increased since 1970 — whereas the median of individual income has not increase. But still, if we have a 65% of the population owning homes, that means 15% have incomes less than the median individual income. These persons are probably not all single owners and are mixed in with the household income, but these two data sets are hard to intersect.

The percent of increase for household income should be equal the percent of increase of the benchmark price in the Case-Shiller index if prices were equivalent, however we are ignoring the individuals upon who this assumption is projected: ie, in the short-term of a decade, is it axiomatic that the increase in median income will flow into increasing the prices of housing irrespective of the current economic situation?

My answer to that question is the reason why I think housing prices are still high relative to median income — household or individual.

The fact that the McMansions should in theory be worth more is interesting, but I feel this will exacerbate the pain on the way down. When a McMansion owner gets layed off, they cannot hope to keep up with the massive utility bills, landscaping costs, taxes and upkeep on these homes. Don’t confuse price with value…they cost more to buy, but in the end that extra, in many cases unneeded space, due to the asscociated higher upkeep, could make the home LESS valuable and saleable. A reversion to smaller sized homes should reflect in a lower index as well.

Personally I don’t think we will go much below 130 for the next 10 years. The thing is that as society gets richer the allocation of income into different types of consumption will change. When you have less wealth/productivity a higher % of that wealth/productivity will be forced into use on food and clothing. As society get richer there is a lot more freedom to allocate more or less income towards a specific category. Right now the culture is strongly behind the idea of living in huge luxury castles as a sign that you have “made it”. Only if that culture changes will we see people inclined to drop houses as a focus of where to spend their income.

I agree, Steve, and many of these enormous new homes’ quality are less than stellar, IMO. I’ve seen a few in my neighborhood recently that make me wonder if my 90 year-old home will be standing well past those newer, charmless boxes.

I’ve had 1998 prices in mind for the proper correction, so I’ll buy 1995 as an overshoot..even if the tapeworm is dead against asset deflation (and doing everything it can to prop them up) so as to protect the concentration of wealth. It’s only a matter of time before the government pulls the spending rug out from under this taco stand…plus, two years ago, I was told that 2011 is when the real fun will begin.

Barry and Steve,
Any chance there is a chart out there comparing price per sq ft over time – factoring in when 20+ year mortgages became available – which could also show average monthly payments (per sq ft?)? I would be interested to find out if we are paying more per sq ft right now when you factor in how much we are paying monthly for each sq ft. Even though we are paying about 35-40% above historical norms for our homes, are we paying the same amount (NOW) per month, because of low rates, as we were (say in 1985)? Maybe this would be a better indicator as to whether we are back to historical (at least monthly) pricing. If we have been paying $100 per sq ft on average for the last 50 years for a home (whatever it has been since long term mortgages became available) and our monthly payment per month – per sq ft – averaged out to X number of dollars, are we now – with the lowest rates in history – paying X dollars per month again? Or X plus? Or X minus?

That steady level seems like a no-brainer to return to, at best. As Steve stated above, the argument that houses are bigger and therefore more “valuable” only makes it worse by increasing cost of ownership. Add in the often double digit inflation in healthcare and education costs and households have even less to spend on housing. Given the population shift of the boomers, this bubble and overhang could not have come at a worse time.

One comment with respect to the median income change since 1970. When broken into deciles, all of the inflation adjusted gains have gone to the top decile. So I think the situation is more grim than it looks when looking at the median. For 80% of the population, income has been flat now for 40 years.

The brains at the Fed are always telling those that will listen that they cannot forecast bubbles, no matter which market. Maybe they should surf the web a little more. This chart portrays the US housing price market to a ‘T’. Nice call.

If only G-man, Kohn and the current thriller, Bernanke, had such ability to understand the house price market!

@Scarlett102: I believe the understood alright (or more than it appears) but they knew that they’d be canned if they did anything substantial to stop it. Too many powerful people were getting rich off it and everyone was happy, including the politicians and the sheeple.

I am curious as to the reasoning of the red “Projection” line on the chart…

Also, RE: “…now that much of the government intervention has run its course. There is still massive Federal Reserve subsidies in the form of record low rates. But the short term bounce caused by HAMP, Foreclosure abatements and first time home buyers tax credits are mostly over.”

I think it would be more accurate to say that some of the government intervention has run its course. In addition, I’m sure we will see more intervention should additional weakness develop in the housing market. (and my analysis indicates that such weakness will be forthcoming)

Small Question. During WW II, the OPA (Office of Price Administration) froze lots of prices. Both rentals and home sales were controlled and locked. There was no civilian construction. How would that have affected the data other than a flat line through the war years?

[...] another chart, documenting the housing boom and subsequent collapse, by Steve Barry via Barry Ritholz and The Big Picture. Ominously, it suggests that housing values are STILL well above historic levels of the past [...]

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Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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